With the passage of Proposition 19 in 2020 came two relevant changes concerning property tax assessments in the State of California that may impact your estate planning.  Some of these changes have already taken effect, while others will go into effect as of April 01, 2021.

Changes to the Parent-Child Exclusion

Proposition 19 limits the availability of the parent-child exclusion for purposes of real estate tax assessments.  It changes this by, first, requiring that the child or children use the residence as their own principal residence or it will be reassessed and, second, by capping the exclusion to $1,000,000.00.

Proposition 19 will prevent the ability of a parent to transfer their personal residence to their children and thereafter rent it back and, if siblings are entitled to the residence at the end of the fixed term, they would need to move in together and share a household to qualify for the exemption – not ideal for most adult children.

Proposition 19 will likely lead to a massive property tax increase, though it may be possible to mitigate this.  There is currently an effort to further delay the effective date of Proposition 19, however currently the law is in effect.  Senate Bill 668, introduced by state Senator Patricia Bates seeks to extend the implementation date to February 16, 2023.

Changes to the Transfer of Taxable Value for Certain Property Owners

The other relevant change in Prop 19 marks a landmark change to Proposition 13. As of April 01, 2021, homeowners that are eligible may transfer their tax basis anywhere within the State of California and to a property of higher value.  This expands upon existing law that limited transfers to only certain counties for homes of the same or lesser value.

Additionally, Proposition 19 increases the number of a times such a transfer can be made.  If a person is 55 years or older, has severe disabilities, or lost a home in a natural disaster, they may transfer their tax assessment up to three times (up from one).

Blending of Taxable Values

Property owners that are 55 and older can now blend the taxable value of their old home with the value of a new (even if it’s more expensive), which will generally yield reduced property tax savings.  For example, if a couple (both aged 55 and above) sell their primary residence which had an assessed value of $500,000.00 for $1 million, and then purchase a new home for $2 million, the new home’s assessed value would be $1.5 million, the difference between purchase and sale of the respective homes  plus the assessed value of the prior home.  Prior to Prop. 19, the new home would be assessed at the full $2 million purchase price unless one of few limited exceptions applied.

This expansion of Proposition 13 is beneficial to homeowners and no real planning needs to be done in connection with this change, but the new rules that apply to transferring taxable value are something homeowners should note.  However, this is not an automatic transfer and in order to make use of the benefit, the requisite forms need to be filed with the assessors’ office.

Please note that this article is only intended to provide some general educational information. For your particular legal questions, be sure and consult with an attorney.

Michael M. Khalilpour | 805-306-1100, ext. 117 | Mike@thegreenlawgroup.com